We all know the three core responsibilities of a CFO, no matter where you work:
- Controllership duties: presenting accurate and timely historical financial data so informed decisions based on trends and past performance can be made.
- Treasury duties: deciding where to allocate company funds to maximize return and minimize risk.
- Economic strategy and forecasting: analyzing data and using that information to seek efficiencies that will increase revenue and decrease costs.
And while there is no difference in these responsibilities at a business development company (BDC), the responsibilities are compounded somewhat. Indeed, the CFO of a BDC serves a dual role as financial overseer of the BDC and informed reviewer of portfolio companies, actual and prospective. For this article, we’ll discuss how the CFO of a BDC handles the latter.
When evaluating a potential investment company, the CFO should take four main steps. First, he needs to review and validate the quality of earnings (QOE) for the potential addition to the portfolio. The CFO must then determine the organizational and financial stability of all prospective investments; a proven record of stability is a must. To accomplish this, the CFO needs to stay current on industry trends, economic factors and changes in market conditions of each industry segment covered by potential investments. With that understanding, the CFO can make an informed appraisal of the risk assessment for each potential investment.
Once comfortable with that assessment, the CFO must combine that with a market level evaluation of the industry sector. And as a last step, the validation of future performance projections must be made and the CFO must calculate the probability that they can be achieved.
A traditional CFO must be a subject matter expert (SME) in only the industry in which his company operates. To be successful, the CFO of a BDC must be well informed across a wide variety of sectors and keep abreast of all economic drivers related to those spaces.